What Will Happen to Oil Prices after November 4?
Anwar Altaqi – Esam Aziz
On November 4, the U.S.sanctions on Iran’s oil exports will go into effect. The question of what will happen to oil prices cannot be answered in absolute terms. Everyone knows what the sanctions are, but not everyone knows the degree of their success. This depends on comparative numbers. In other words, it depends on how effective the sanctions will be. And effectiveness is measured by how many barrels Iran loses from its global market share — from its-oil based revenues.
Even before sanctions hit Iran’s oil exports in early November, August numbers recorded a noticeable fall in Iran’soil exports, to below two million barrels.
Then, in September, the trend was not mitigated, but, rather, deepened. Going forward, there are two major factors for determining how low Iranian oil exports could sink. One is how much of Iran’s oil will be purchased by China, India, and Europe in October and then in November, when the sanctions kick in. The other is the concern that tanker-tracking data may become less reliable, as Iran may try to use some “unconventional” methods to keep its oil sales up, like switching off tracking devices on tankers — a tactic we described in our last issue.
Iran may deliberately divert attention by focusing on the increase in its condensate. But this increase is certainly short-lived. Smuggling, invisible cargos, large discounts, and a short of condensate in several consuming markets helped move the figures a bit higher in the second half of September, according to some market analysis. Yet, if the trend continues this month, Iran’s oil exports would still be around 200,000 barrels per day (bpd) lower than in August, when exports averaged 1.92 million bpd, down from 2.32 million bpd in July, according to Platts estimates. Bloomberg analysis agrees, saying that Iran’s crude exports from September 1 through September 15 were 1.6 million bpd, with condensate exports at another 190,500 bpd, for a total of around 1.8 million bpd.
Nevertheless, the issue of measuring the magnitude of the impact of U.S. sanctions is still not settled. There is a continuous debate among experts and market analysts focused on how cooperative the buyers of Iran’s oil will be. It is indeed a tough issue to settle. Numbers are difficult to pinpoint precisely before we actually see what happens.
For example, China plays an important role in defining the outcome of sanctions. While the Chinese are saying that they will continue buying oil from Iran, despite the sanctions, no one knows for sure if their commitment not to increase imports from Tehran will be respected. Moreover, there is wide expectation that China’s overall demand is heading for a slowdown.
The Chinese played a cheap card in their talks with U.S. officials. They said that effective November 4, they will not increase their purchases of Iranian oil. But the word “increase” begscomparison. “Increase” compared to what level? Would it be the average of imports in the year 2017? Would it be the average in the first 10 months of 2018? Or would be the levels of October — that is, the levels of the month preceding the implementation of the sanctions?
Due to their trade war with the United States and their frustration with the Trump administration’s policies, the Chinese opted for an old trick. They committed to not increasing their imports from Iran in very general terms. The commitment was made in June; since then, they increased imports dramatically. When pressured about not decreasing imports, Chinese officials will likely say they vowed not to increase imports from Iran in November — that is, compared to the numbers of October, which were artificially and intentionally made higher.
China cannot resist Iran’s generous crude discounts, particularly after the sanctions. Yet, China can neither reverse a trend of lower demand by its own market, if such a trend indeed materializes. From September 1 to September 15, China’s oil imports from Iran surged to 813,333 bpd, nearly double the 466,333 bpd imports from August 1-15. For the whole month of August, Chinese imports from Iran averaged 505,033 bpd, Platts data showed.
India is the second largest importer of Iranian crude, and it practically cannot shut off its imports from Iran. It will be very difficult to fill the gap in India’s demand, particularly in terms of the quality of its Iranian imports, compared to India’s refiners. This is why India is now pushing to get waivers from the U.S. sanctions. But Washington’s resistance to giving “carte blanch” to any buyer from Iran is making this goal a tough reach. India’s imports from Iran in September are expected to be 45 percent lower than the average between April and August — 360,000 bpd-370,000 bpd for September/October compared to 658,000 bpd for April-August, according to data from trade tables.
Europe draws a different picture. Iran’s sales to Europe in the first half of September also jumped, with purchases from Italy, Spain, and Turkey remaining steady. While Turkey may keep Iranian oil flowing, analysts widely expect European Union (EU) companies in Italy, Spain, and France to cut off oil trade with Iran out of fear of being cut off from the U.S. financial system. The European alternative payment mechanism is essentially obsolete.
In fact, researching the figures more cautiously indicates that Iran may very well lose more than the half million barrels expected even by U.S. officials. The common prediction among experts today is that Iran’s exports will drop by between 1.5 to 1.7 million barrels daily from about 2.7-2.8 million barrels per day in January 2018. If true, this means Iran will export around 1-1.2 million barrels per day in 2019.
We do not share this dramatic prediction. We expect Iran to lose anything between 500,000 and 1 million barrels per day. The reason is that the United States will use the waiver policy to control the amount of Iranian crude reaching the global market and balance the moves of the pricing curve. If prices overheat, Washington will use this policy to increase Iran’s exports by allowing more countries to import more Iranian crude. If it does not do that, prices could reach $100 per barrel by next spring. Eyes will focus back on the slowdown of demand, rather than on Iran, as it would be possible to compensate for any reasonable loss of Iranian crude in the global market.